Current issues in economics

Trump – why is he really putting tariffs on steel and aluminum?

Donald Trump announced on 2nd March that the US will impose a 25% tariff on steel imports and a 10% tariff and aluminum imports. A tariff protects domestic firms against overseas competition and raises revenue for the government. A tariff is a tax placed (or levied) on imports that raises the price of imported goods thereby making locally-made products relatively more price competitive. This may protect jobs and/or improve the balance of payments but it can cause resentment overseas. High tariffs on imports may cause a country’s trading partners to retaliate and follow suit by placing tariffs on exports of foreign made goods. Notice on the graph below how a tariff reduces the quantity of imports from 6m bottles to 2m bottles and the domestic supply increases from 2m to 4m bottles.

For many years US producers have found it hard to compete with cheap imports and this has led to many steel plants closing down with thousands of workers losing their jobs. Two main factors have caused this:

Global steel and aluminum production has increased significantly over the last 15 years which has created excess capacity.

Chinese firms have been widely accused of pricing below the cost of production in order to get rid of excess stock

Previous Tariffs – nothing new here.

The US is not the only country or group to impose tariffs on foreign products. The EU has done the following:

Put a tariff of 28.5% on certain types of steel pipes and tubes made in China after it was found that the prices were artificially low.

Imposed 43 anti-dumping and anti-subsidy measures, 20 of which are on products originating from China

The Obama Administration also was active in counteracting alleged Chinese dumping.

March 2016 – they put a 265.79% on imports of cold-rolled steel, used to make auto parts, appliances and shipping containers, from seven countries including China.

May 2016 – to clampdown on the glut of steel imports the US imposed anti-dumping and anti-subsidy duties of up to 450% on corrosion-resistant steel form China.

What is the difference between previous tariffs and Trumps announcement?

The difference here is that Trump’s tariffs would apply to all products rather than targeting particular areas of steel and aluminum production. Trump seems to be threatening action against any nation that runs trade surpluses with the United States. He tweeted last week:

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,”

“Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore—we win big. It’s easy!”

The EU maintain that the key problem is as mentioned above is global over capacity caused by non-market production – producing the output even though there is no demand for it. They are of the belief that this can be dealt with at the source – i.e. those countries over producing. The oil industry seems to work in a similar way with OPEC where production can change with negotiations between oil producing countries. However if a trade war does eventuate Europe has warned the US to expect imports tariffs on American icons like Harley-Davidson, Levi’s jeans and Kentucky bourbon.

China is not the big importer into the US

It seems that in a lot of his communication he singles out China as being the problem especially with the trade deficit the US has with that country. However China only supplies 2.9% of US steel imports – see below:

Top steel exporters to the United States with their corresponding percentage of total U.S. steel imports:

Canadian steel producers, like their U.S. counterparts, have been complaining about Chinese firms dumping products in the domestic market. Sensitive to these complaints, the Canadian government has long imposed protective duties on some Chinese exports, such as hot-rolled steel plate. On Thursday, the Canadian International Trade Tribunal indicated that these duties would remain in place. On this issue, at least, the United States and Canada should have been able to find common ground. Instead, Canada, like the E.U., is threatening to retaliate against Trump’s plan.

Source: Wood Mackenzie

Why is Trump really doing this?

As with any politician it is all about popularity. Part of his rhetoric on the election campaign was to make America great again and to revive the heavy industry in areas such as Pennsylvania (steel production) a normally very safe seat for the Republicans – in fact the Democrats didn’t even field a candidate in the last election. However, Trump voters are disappointed with his presidency and, with the Democrats fielding a candidate, the forthcoming special election in western Pennsylvania is too close to call. An upset victory by the Democrats, or even a narrow loss, would make the midterm elections a very close contest as the Democrats try to retake control of the House of Representatives.

The big question is will Trump go ahead with the tariffs or back down as he has done with immigration etc.